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CEEMEA Weekly Summary - 19 March 2014

Core Content Overview

This week's CEEMEA Weekly report focuses on political and economic developments in South Africa, Poland, and Turkey, alongside broader regional and global market implications. The report highlights the ongoing geopolitical tensions in Russia, Crimea, and Ukraine, as well as domestic issues in South Africa and monetary policy outlooks in Poland and Turkey.

Key Themes and Developments

South African Politics: Risky Business

• President Jacob Zuma Misuse of Funds: The Public Protector ruled that President Zuma improperly used state funds to upgrade his Nkandla home, amounting to misconduct but not necessarily misleading parliament.
• Impact on ANC: The ruling is seen as damaging to the ANC, likely costing it votes in the upcoming May general election.
• Trevor Manuel's Exit: Former Finance Minister Trevor Manuel, despite a farewell speech, is expected to emerge as a public critic of the ANC, though not joining any opposition party.
• Political Tensions: The report notes growing discontent with government intervention in the economy, particularly in the mining sector, where labor unrest and regulatory pressures have created fractures.

South African Inflation: Measure for Measure

• Headline Inflation: South African consumer prices rose to 5.9% y/y in February, up from 5.8% in January, driven by insurance premia, fuel, and food prices.
• Core Inflation: Core inflation (excluding food, non-alcoholic beverages, fuel, and energy) rose to 5.3% y/y, marking the first increase in six months. This signals potential second-round inflationary pressures.
• SARB Policy Outlook: The South African Reserve Bank (SARB) is expected to adopt a more measured approach to rate hikes, likely increasing rates by 25bp in March. The Bank is cautious due to the weak economic environment and subdued inflation expectations.
• Currency Impact: The weaker ZAR continues to limit the pass-through of input costs to consumer prices, though there is a risk that this could change if the currency remains weak.

Polish Inflation: The Only Way Is Up (But Not Yet)

• Current Inflation Trends: Polish inflation remains low, with headline CPI inflation at 0.5% y/y in February, following a revised basket weighting.
• Future Outlook: Inflation is expected to gradually rise from Q2, reaching 1.5–2.0% y/y by year-end. A stronger domestic demand and the closure of the negative output gap will drive higher inflation in 2015.
• Monetary Policy: The National Bank of Poland (NBP) is unlikely to raise rates before 2015, but may implement a robust 100bp tightening cycle over a short period in 2015.

Turkish Monetary Policy: Holding Tight

• CBRT Policy Stance: The Central Bank of the Republic of Turkey (CBRT) kept its key rates unchanged, maintaining a tight monetary policy stance.
• Inflation Trends: Annual inflation is expected to rise through June, and the CBRT will likely keep interbank overnight rates close to 12% to manage inflation expectations while slowing economic growth.
• Bank Ratings: Moody's downgraded the outlook for 10 Turkish banks due to slower growth, higher funding costs, and political uncertainties.

Summary of Key Economic Indicators

Market Implications

• CEEMEA and Global Markets: The Crimean crisis and Russia-Ukraine tensions remain a key market focus, with limited immediate economic impact despite ongoing sanctions.
• South Africa: Political and economic risks are intertwined, with the ANC facing reputational damage and potential voter loss. The SARB is expected to proceed cautiously with rate hikes.
• Poland: The NBP is expected to maintain a stable interest rate policy in 2014, with a tightening cycle anticipated in 2015.
• Turkey: The CBRT is expected to keep rates high, with the focus on curbing inflation while managing the slowdown in economic growth.

Key Takeaways

• The political scandal involving President Zuma is a significant risk for the ANC's electoral prospects.
• Core inflation is a critical indicator for future inflationary pressures in South Africa.
• The SARB is expected to hike rates gradually, with a 25bp increase likely in March.
• The CBRT is maintaining a tight monetary policy in Turkey, with rates likely to stay near 12%.
• Poland's inflation is expected to rise gradually in 2014, with a more significant increase in 2015.
• The report emphasizes the importance of data and economic conditions in shaping future policy decisions.